February 7, 2008: Sovereign Wealth Funds: Selling our National Security

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It is my privilege to testify today before the United States-ChinaEconomic and Security Review Commission. Please let me thank thehearing co-chairs, Chairman Larry Wortzel and Commissioner PatrickMolloy, along with the rest of the Commission, for this opportunity toaddress the increasingly-important topic of sovereign wealth funds andtheir impact on America’s national interest.

Please let me beginwith a real story from a senior citizen from our Ohio district who thispast week told me about her family’s plight. She and her elderlyhusband live frugally on Social Security. Sadly, their married son’swife died recently. Moreover, he has lost his job with two children tosupport. So the grandparents are doing their best to help their son getthrough difficult times. In wondering where good jobs were to comefrom, she lamented how America had transformed into a totally differentplace from when she and her husband were working. She said, “Marcy, ourcountry doesn’t belong to us anymore.”

It is refreshing that there is a body here on Capitol Hillinvestigating the explosion of foreign government investment into oureconomy. This is an issue not only central to U.S.-China relations,but also to our relationships with a number of other countries. Chinais not the only country to invest its surplus savings into ourcash-short banks and financial institutions. As America becomes moredebt-laden and faces recession, oil-producing countries and other Asiancountries with which we already have staggering trade deficits likeJapan, Russia, Singapore, Kuwait, and the United Arab Emirates, amongothers, contribute more and more to this trend.

These funds are the latest symptom of a decades-long problem. When Ifirst arrived in Congress, I pointed out (and fought against, to noavail) the growing trend of foreign purchases of U.S. treasurysecurities. In 1983, the percentage of foreign-held debt was less than17%. But by 2006, that figure rose to 54%.

To date, your Commission has focused on issues relating directly toChinese-American policy, and China’s financial maneuvers certainlypresent a large threat to American economic security. However, Ibelieve this issue is so important itmust be viewed through a larger lens. As my old professor at HarvardBusiness School used to admonish, “If you want to know the way theworld operates, follow the cash.”

These funds haveexisted for decades. Yet the term “sovereign wealth fund” has onlyrecently entered the public’s vocabulary as our sovereignty andeconomic ownership slip out of our grasp. These funds, enriched beyondimagination by U.S. dollars from foreign imports such as petroleum,have swooped in only too happily to “rescue” Wall Street, investmenthouses, and banks that are faltering as a result of the sub-primemortgage crisis and the very flawed trade models, like China PNTR, thatare trademarks of American economic policy. The power of petroleum isobvious on the chart I included, which shows that among ten of thelargest sovereign wealth funds, 69% of these assets exist in fundsfinanced by oil revenue.

To prop up Wall Street, Chinese funds recently invested $5 billion inMorgan Stanley and $3 million in Barclays. Citigroup just accepted $22billion in buyouts, including a significant amount of money fromSingaporean, Kuwaiti, and Abu Dhabi funds. Merrill Lynch sold stake tothese funds when the governments of Korea, Kuwait, and Singaporecontributed to a buyout.

Mr. Lou Jiwei, the head of China Investment Corporation, China’s $200billion sovereign wealth fund, claimed last week in the New York Timesthat the Chinese government, through his fund, is focused more oninvestments in portfolios than in individual companies. He did not ruleout making direct investments, as in the case of Morgan Stanley Imentioned earlier.
He said, “If there is a big fat rabbit, we willalso shoot it. Some people will say we were shot by Morgan Stanley. But who knows?”

Think about that statement. “If there is a big fat rabbit, we will also shoot it.”

Mr. Lou Jiwei fancies himself to be a big game hunter, to be sure. He’s not content with small game. Oh, no. He loves to shoot big, fattargets. Targets such as Morgan Stanley and Blackstone.

He certainly has plenty of ammunition: $1.4 trillion in foreign reserves.

The policy question for us is whether the United States will requirehim to buy a hunting license. Will we regulate Mr. Jiwei’s hunting bydeclaring a season and a bag limit? Will we require background checksbefore he buys a gun to hunt his prey?

And what if Mr. Jiwei’s acquisitions threaten U.S. security interests in products, processes, or intellectual property?

Will we sit back and let the Lou Jiweis of the world fire at will, claiming our assets and extirpating our businesses?

Instead of rescuing our economy, these investments only deepenAmerica’s insecurity, forcing the U.S. further into debt to foreigninterests. More often than not, these deals are presented as purelyfinancial when they are, in fact, political and strategic.

The funds suffer from a severe lack of transparency, especially withregard to governance. So many are run by undemocratic governments withpowerful strategic objectives. I included with this testimony a graphplotting the funds according to their level of transparency and styleof investment approach. There is the possibility that ulterior motivesexist for these countries, and that these financial investments areaimed at strategic results. For those who think there should be littlegovernment involvement in the workings of our markets, it should beobvious that foreign government meddling and takeovers of privateenterprise are even more dangerous—some would say socialistic. Americaneeds to reclaim our economic independence and security while retainingthe integrity of our markets to remain prosperous.

What should we do about these threats? First, secure transparency. Then, analyze. And if there is the potential for destructivepractices, regulate.

We must require disclosure and increased transparency of all sovereignwealth fund bids. Stake-holders, stock-holders, and the government needto ask: Who operates these funds? How big are they? Are they audited?If so, by whom? What are their investment policies? What are theirtrue motives?

Some funds are willingly transparent, like Norway’s, so there doesexist a standard for how much information can and should be disclosed.Others, like the Chinese funds that bring us here today, obscure theirinvestment strategies, and have unconventional investment patterns.

That brings to light my second concern—political motives. It is not justthe rogue academics raising the alarm. In a cover story last month, theEconomist reported that “China and South Korea want returns—and possibly access to markets, ideas and technology.”

In addition to requiring transparency, in order to see how immense thisproblem has grown, Congress needs also to examine regulation. Thiswould normally fall to the Committee on Foreign Investment in theUnited States, also known as CFIUS, but there are questions as to howreliable this body is. Beyond methodological objections regarding howwell these funds can be tested by existing models, many of us haveexpressed concern that the Committee is governed by the skewedinterests of those involved in approving these transactions.

President Bush recently signed an executive order transferring his ownpower to the Treasury department to authorize or reject foreigntakeovers of American companies. But officials from the DefenseDepartment, the Department of Justice, and the Department of HomelandSecurity objected to the order over the past few months saying itserved business interests over security interests. It allows WallStreet to continue to profit at the expense of national security.Furthermore, President Bush stripped from this order the provision thatrequired the Committee to “monitor the effects of foreign investment inthe United States.”

Congress needs to reassert our power and pass legislation thatmaintains as presidential the authority to approve or reject thesedeals. I have drafted legislation to do exactly that. Congress mustrequire the Administration to report back in order to prevent thepresident from delegating this important national security authority toany cabinet officer or executive agency. The U.S. government alwaysneeds to act in the name of national security before privateinterests. After all, our Congressional oath requires us to “supportand defend the Constitution of the United States against all enemies,foreign or domestic.”

Some might object to increased government involvement in the economy ifwe require transparency. But American government involvement ispreferable to foreign government involvement. We need to prioritize thesecurity of our citizens, businesses, and economy as a whole. Ournational security is far more important than Wall Street’s interestsand more important than doling out U.S. liberty in order to rescuereckless megabanks from their own bad investment decisions.Furthermore, our nation should regulate a savings policy direction andreject the debt path Wall Street is imposing on Main Street.

Our economy is suffering enough as it is. Our federal governmentshould be working to rebuild our economy, create new jobs, and lessenour dependence on foreign oil. Instead, it is allowing foreigngovernments to control greater and greater shares of our economy. Let’s require transparency, balance the approval process for foreigninvestments, and reclaim our national security from sovereign wealthfunds. The U.S. government must stand up for the American people in theface of this opaque and increasingly-powerful threat to our sovereignty.